You always pay the spot market price, not your bid. Your instance gets killed if somebody outbids you. A higher bid increases the probability that your instances don't get killed while at the same time letting you pay spot market price.
By bidding above on-demand price, you are speculating that for the majority of the time, nobody else will bid more than the on-demand price. If you're not the only one doing that, spot price can rise above on-demand price.